XINGTAI, China—The "steel king" of this drab city in northeast China was forced to shut down his mill and furlough some 3,000 workers without pay last November after the company's banks cut off funding.

It was a big blow for the magnate, Wang Chaojun. But it was a triumph for Beijing, which last year moved to stem excess factory production that is weighing on the economy and turning Chinese skies gray with smog. The banks,...